Property: The answer may be blowing in the wind
READERS' LIVES; Investing in renewable energy ... state pensions ... personal allowances. Your queries answered
Sunday 03 August 1997
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In a recent pensions article, the Independent of Sunday said of Serps (the earnings related state pension) that many people will not receive the full benefit. This seems an alarming assertion. What does it mean?
The Serps pension - and whether governments of the 21st-century will be able to afford it - is a highly topical and contentious issue. Serps is likely to be scrapped by the Government once it has completed its root-and-branch review of pension provision. But whatever Labour may do to Serps in the future, even as things stand many people will not be entitled to a Serps pension, while others may have built up an entitlement in respect of only part of their working lives.
It is currently possible to build up entitlement to two distinct state- run pensions: the basic state pension and the additional pension, also called state earnings related pension, or Serps for short. Entitlement to both parts of the state pension depends on the national insurance contributions you pay, and on quite separate and different formulae.
The precise formula for working out a Serps pension is complicated. But an important characteristic of Serps is that, as its name implies, the pension you get will be related to your earnings while you are working - the more you earn (within limits), the higher your Serps pension.
It may come as something of a shock to some people to discover that, as such, they aren't building up any entitlement to Serps. Many employer- run pension schemes have contracted out (taken their members out) of Serps. Likewise, many employees have chosen to contract out of Serps through individual personal pensions. In each case the national insurance contributions that would otherwise have funded a Serps pension have been diverted to enhance the value of your occupational or personal pension. In many cases you will not lose out overall; nevertheless you should remember that you will not be due a Serps pension for the period you contract out.
Other groups of people are also not building up Serps entitlement, notably the self-employed and the unemployed. Their national insurance contributions (or credits) do build up entitlement to the basic state pension, but not to Serps.
It is not possible to contract out of the basic state pension. But it is possible to fail to build up entitlement to the full, flat-rate basic pension. This can happen if you don't pay the minimum level of national insurance contributions for a sufficient number of years during your working life - perhaps because you did not earn enough or because you paid no national insurance while a full-time student or while you were working abroad.
The upshot of all this is that many people won't get the state pension they may be assuming they'll get. And while the much maligned state pension alone is unlikely to be big enough to maintain the standard of living most would hope for, it can provide a key - and inflation-proofed - part of overall income in retirement. So any one who is planning their finances in retirement should make sure they have a clear idea of their likely state pension. You can get a forecast of your state pension from your local Benefits Agency, part of the Department of Social Security.
I'm a full-time housewife and my only taxable income is from income bonds and a building society account. This year it looks as if I shall have a surplus personal allowance of pounds 500 to pounds l,000. I have a taxable gain from my Halifax shares of over pounds 2,000, even after the capital gains tax allowance. Can I set this gain against my excess personal allowance? MG, Reading
No, the personal allowance of pounds 4,045 (for those under 65) in the current tax year can be used only to reduce your income tax bill, not your capital gains tax bill. While the first pounds 6,500 of chargeable gains are tax-free, anything over that amount is taxable.
The rate of capital gains tax is 20, 23 or 40 per cent, depending on what tax band(s) your taxable gains fall into when added to your income. The first pounds 4,100 of income is taxed at 20 per cent. In your case, you won't have used any of this band for income tax, since your income is less than your personal allowance. So taxable gains of up to pounds 4,100 will be taxed at 20 per cent.
Capital gains tax is charged for the tax year in which you dispose of an asset. You will have a capital gains tax bill only if you have disposed of your Halifax shares for more than pounds 6,500. If you still have the shares but want to cash them in, consider selling only pounds 6,500 worth now, thereby incurring no tax liability. You could then look to selling the remaining shares tax-free in a subsequent tax year.
Write to Steve Lodge, Personal Finance Editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a phone number. Alternatively, fax 0171-293 2096/2098 or e-mail: indybusiness@independent. co.UK. Do not enclose SAEs or any documents that you wish to be returned. We cannot give personal replies or guarantee to answer every letter. We accept no legal responsibility for any advice given.
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